The Chinese data elephant in the room

The potential of a Chinese data disappointment hung heavy over relatively muted Asian trade.

China
Source: Bloomberg

Most indices in the region were loath to move dramatically away from the previous day’s close in either direction. The market will be receiving China’s October retail sales, industrial production (IP) and fixed asset investment (FAI) figures. The market consensus is currently expecting a slight improvement in IP, unchanged retail sales and slightly weaker FAI.

China’s trade and inflation data this week has already disappointed market expectations, which does not enliven much optimism ahead of today’s releases. IP in particular significantly underperformed market expectations, so to see it drop below 5.7% would be particularly concerning. Misses on the IP and FAI numbers are likely to impact commodities and commodity-related currencies. The Aussie dollar and the ASX would both be impacted by a major miss.

The problems with China’s industrial sector are well-known. Over-capacity, unsustainable debt levels, state-dominance and a reticence for productivity boosting reforms in the sector continue to bite into its performance. China’s monetary easing and stepped up fiscal stimulus is expected to draw a line beneath the declines seen in the secondary sector, but it would be unrealistic to expect a major outperformance.

In China’s difficult rebalancing from investment to consumption, the retail sales figure is increasingly important. After seeing retail sales bottom at 10% in April, the data has been steadily increasing. Expectations are now for the data to come in unchanged. However, a major miss on the retail sales number would be very damaging for sentiment around China’s economy, as consumption and the services sector are really the only bright spots in the economy at the moment. There has also been a major rally in a range of “New China” stocks globally, from nappy-maker Kao Group to vitamins manufacturer Blackmores. Many of these stocks have seen major rallies over the past 12 months or so, and their high valuations do look susceptible to any concerns over the Chinese consumer.

Australia

The Westpac Consumer Confidence Index are painting a cautiously optimistic picture as we head into the Christmas sales period.

The Index hit 101.7, which is only the third time it has broken over 100 since February 2014. This is consistent with yesterday’s ANZ Roy Morgan weekly consumer confidence index, which was also at its highest levels since the start of 2014. Both indices dived in the wake of the harsh 2014 Federal Budget. If consumer sentiment can hold up heading into the Christmas sales season, this could be a positive for some of the ASX listed consumer-focussed stocks. The momentum of the Westpac index’s year-on-year performance does actually point to a more sustained rise in consumer confidence than the headline index as we head towards the end of the year.

JB Hi-Fi (JBH) is in focus as one of the most heavily shorted stocks on the index despite its reasonably strong earnings performances of late. The stock is also trading at some of its lowest levels since March just above the A$17.50 mark and looks primed for a bit of a bounce if some of these short positions do start to cover in significant amounts. Noticeably we did see the stock gain a fair bit of upward momentum in the wake of the upbeat Westpac consumer confidence number at 10.30 AEDT. Currently, JBH has gained 2.6% on the day and is one of the best performing stocks on the ASX today.

The biggest drag on the index looked to be the family finances components, which were both firmly in negative territory. The economic conditions and “good time to buy major household items” components were still comfortably in positive territory.

ASX

The ASX saw hesitant moves ahead of the major Chinese data release slated for 16.30 AEDT. Although the overall index struggled to move much above the 5100 mark, the decent performance of the banking sector did augur well for the market’s performance going forward.

Westpac went ex-dividend today, which put its stock in negative territory and took roughly 12 points off the ASX today. But the strong performance by the other banking stocks was a relief for the index given its poor performance over the past two weeks. The banking sector as a whole gained 0.8%, although there are mounting concerns that the banks may struggle to keep up their progressive dividend policy going forward. No doubt such news, were it to be announced, would see a sharp selloff in the bank’s shares. With the Big Four banks’ payout ratios currently around the 75% mark, a noticeable drop off in cash profit is going to see the dividend use up an even higher percentage of that, leaving less capital for new growth areas of the business.

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.